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Geithner's 'Stress Test': Memorial Day Beach Reading?

It appears that the belly aching over former Treasury Secretary Tim Geithner’s new book, Stress Test: Reflections on Financial Crises, has finally subsided. It’s time to actually read in its entirety the nearly 600-page hardcover, preferably on a beach. I am not going to quibble with Geithner’s actions. Just one of his comments I read doesn’t ring true to me and, more important, to other free-market minded critics, some who have actually worked in the banking industry.

Geithner says he resisted calls from members of President Obama’s staff to fire the CEO of failing banks and other calls to “nationalize” the banks.

Here is the thing: The financial market is not a free market—sorta but not really. I know I’ll take a lot of guff for supporting this assertion made by some experts in some quarters. Yet I agree: The U.S. financial market is essentially government run. Don’t believe it? All you have to do is look at the alphabet soup of regulatory bodies and the thousands of pages of rules and regulations and the cajoling by the government to force banks to lower their lending standards so that the “dream” of homeownership could be attained by all—even if one is a risky borrower. (That is still the government’s policy, which announced in mid May, that it would try to keep the home-mortgage machine pumping by not raising lending standards and that it would increase aid to distressed homeowners.)

Here is another thing: Among the worst of the offenders during the crisis were government-backed entities, Fannie MaeFannie Mae and Freddie MacFreddie Mac, two entities that together back around two-thirds of the home-mortgage market. And the crisis was ushered along by a government-caused monopoly—the debt rating companies.

In chapter three of his book, Allison begins his main argument. And it is strong. Allison says that the Fed, created in 1913, effectively “nationalized” the U.S.’s monetary system.

The federal government owns the monetary system. We do not have a private monetary system in the United States. Problems in the monetary system were the source of the current Great Recession. If there are problems in the monetary system, they are, by definition, caused by the federal government, because the federal government owns the monetary system.

I’ll admit that the quote above sounds like a tautology. But it’s true: The Fed has almost limitless regulatory authority over banks—with an assist from the various other regulatory bodies and political pressure. The Fed and the other regulators were asleep at the wheel and did not see, according to Geithner, the crisis coming. For example, this is Geithner’s cringe-worthy answer to a congressman’s question at his nomination hearings: “I just want to correct one thing. I have never been a regulator, for better or worse.” That is funny: He was head of the Federal Reserve Bank of New York.

Also, chuck onto the list of culprits: the Department of Housing and Urban Development (HUD), the Federal Housing Administration (FHA), “local government zoning restrictions and so on,” Allison says. And yet some argue that the banking industry was deregulated under George W. Bush and therefore the cause of the crisis. “Nothing could be further from the truth,” Allison says. Actually, regulatory burdens increased under Bush and regulatory costs were at an all time high (except for the current period).

It is the Fed that is primarily responsible: The Fed controls the money supply via the banking system, along with the Treasury, as it can print money (and are doing so with the quantitative easing program). Politicians like this—some inflation—because it allows Congress to “undertake many programs that accumulate debt (and buy votes) . . .” After all, the Fed came to the rescue and saved the humongous institutions it felt were absolutely necessary to the banking system.

With housing prices soaring in some markets, some wonder if we are creating another housing bubble now. Trulia, an online residential real estate site, said in a recent article on Forbes.com, that no, we are not because institutional investors are leery of the CDO market, the complex financial instrument that helped fuel liquidity in the lending market.

[A side note: Geithner’s book has a snappy title, but there might have been some other good ones. For example, last year, Fox Business News reporter Charlie Gasparino offered some of his own book title ideas—most of them pretty harsh. An Idiot’s Guide to Screwing Up the Economy is just one suggestion on Gasparino’s blog last year. He also suggested:What I saw at the (Socialist) Revolution. Another choice one: Mysteries of Space: How a Guy with Little Between His Ears Made It So Far.]

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